Pason Systems Inc. (TSX: PSI)

Pason Systems Inc. (TSX: PSI) is a leading global service provider of specialized data management systems for drilling rigs. Its solutions include data acquisition, wellsite reporting, remote communications, web-based information management, and analytics, enable collaboration between the rig and the office. 

Key highlights

• Improving scenarios for US Drilling Activity: Many indicators point to continued land drilling activity in North America, which is a huge positive for the company. Land rig counts in North America were down 45% in Q1 2021 compared to the previous corresponding period, but they are up more than 90% from their low point in the summer of 2020.

• Advancing in the solar and energy storage market: Through Energy Tool base (ETB), the company continues to enhance its efforts in the solar and energy storage markets. With a huge subscriber base, its software package for economic research and proposal creation remains a popular choice among project developers. Bookings for new installations and a pipeline of possibilities for the company's energy storage control system continue to grow, providing an additional source of cash flow.

• Strong competitive position: In the first quarter of 2021, the company maintained its strong competitive position. Revenue per industrial day in North America was CAD 720, which was down 2% on Y-o-Y basis and constant from the previous quarter. International revenue, on the other hand, was down 24% on Y-o-Y basis but up 23% sequentially as industry activity improved across the major operating regions.

• Industry beating margins: Despite the hard time, the management’s solid determination helped them leaping the industry median margins on many fronts in Q1 2021, which is a key positive. The chart below gives a glimpse of this.
  

Financial overview of Q1 2021

Source: Company 

• The company generated CAD 42.6 million in revenue in Q1 2021, a 42% reduction from CAD 74.0 million induced in the previous corresponding period. The decline in revenue was primarily due to lower performance from the North American business unit and the International business unit.
• Gross profit for the reported period fell to CAD 15.8 million, against CAD 34.3 million in pcp, primarily due to lower revenues, partially benefited from lower operating expenses.
• The company reported income before income taxes at CAD 5.2 million compared to CAD 23.5 million in pcp, partially offset by higher stock-based compensation and benefitted from extra other income.
• Net income for the reported period declined to CAD 3.9 million, against CAD 16.5 million in pcp, primarily due to rationales discussed above.
  

Risks associated with investment

Due to high dependency on the oil and gas clients, the adverse effect on crude oil demand can hit the company's revenues. Lower demand for crude oil would result in lower drilling activity, which would impact the company's prospects. 

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

To maintain its competitive position, the Company continues to invest in the technology and service capabilities it requires. We believe that by putting these capabilities in place, it would be able to generate significant additional earnings. Despite this, numerous signs indicate to land drilling in North America continuing to grow, which is important for the company. Furthermore, the business continues to extend its efforts in the solar and energy storage markets through Energy Toolbase, with good bookings for new installations and a growing pipeline of possibilities for the firm's energy storage control system, which provides a new source of cash flows. Based on technical analysis, the stock has support at CAD 7.4 level. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 9.04 on June 24, 2021. We have considered Computer Modelling Group Ltd, Tervita Corp, Aspen Aerogels Inc, etc., as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-Year Price Chart (as on June 24, 2021). Source: Kalkine Research 

H2O Innovation Inc (TSXV: HEO)

H2O Innovation Inc (TSXV: HEO) is a Canada-based company that provides water treatment solutions based on membrane filtration technology for municipal, energy, and natural resources end-users. The company has three divisions that are water technologies & services (WTS), specialty products, and operation and maintenance services(O&M).

Key highlights 

• New contract Win: HEO recently received the Operations and Maintenance (“O&M”) contract for the Town of Warren located at Rhode Island with a total worth of around a CAD 5.0 million, which would increase its total O&M sales backlog to CAD 71.3 million. The contract will officially begin on July 1, 2021, includes supply of operation and maintenance services for a 2 MGD, wastewater treatment facility and pumping stations for five years. We believe the contract is strategic for the company as it expands its O&M presence in the Northeast US.
  

• Focused on expansion across Latin America: The company is looking to increase its presence across the Latin American market through the recent acquisition of Genesys Membrane Products S. L. The group expects this to boost the product portfolio. At the same time, the company would further focus on strengthening the existing relationships and building new relationships with original equipment manufacturers across the LATAM region.

• Increasing cash flow: In Q3 2021, cash flows from operating activities generated by the company stood at CAD 10.2 million compared to CAD 0.8 million in the previous corresponding period. The increase in cash flow from operations resulted primarily from the net earnings of CAD 2.1 million, plus CAD 1.6 million of non-cash adjustments to the net earnings. Adjusted free cash flow increased to CAD 9.4 million in the reported period, from CAD 0.3 million in pcp. The increase was primarily related to higher favorable changes in working capital items.               

• Reduced debts: The company's net debt was CAD 3.3 million on March 31, 2021, down from CAD 10.5 million on June 30, 2020. A reduction of CAD 7.2 million, or 68.6%, was mainly due to the cash flows generated by operating activities and beneficial adjustments in working capital items.
  

Financial overview of Q3 2021 (In thousands of Canadian dollars)

Source: Company 

• In Q3 2021, the company reported higher revenue at CAD 39.1 million against CAD 36.0 million in the previous corresponding period. The increase was driven by strong momentum from the WTS segment, while decent growth from specialty products and the O&M segment also supported the top-line.
• On the back of lower operating expenses in the reported period, the company registered an operating profit of CAD 1.1 million against a loss of CAD 3.2 million in pcp. Thanks to no impairment cost in this period.
• The company’s net earnings stood at CAD 2.0 million compared to a net loss of CAD 3.0 million in pcp; this turnaround was mainly due to higher operating profit and fair value gain on step acquisitions. 
  

Risks associated with investment

The performance of the company might be impacted due to a change in technology, entry of new players with value-added products at a competitive price leading to price competition and margin erosion etc. 

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

The firm delivered an excellent financial performance for its Q3 results, producing free cash from operations while maintaining consistent margin growth, which is a major positive. Furthermore, with the recent acquisition of Genesys Membrane Products S. L., the firm is concentrating on expanding its operations across the Latin American market, which we believe would offer new cash flow avenues. The firm is also continually managing the health of its balance sheet, reducing net debt by 68% to CAD 3.3 million in Q3 2021, which is a significant plus because it would assist in lowering financing costs and boosting profits. Based on technical analysis, the stock has support at CAD 1.85 level. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 2.25 as of June 24, 2021. We have considered Xebec Adsorption Inc, Bird Construction Inc, Aecon Group Inc, etc. as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-Year Price Chart (as on June 24, 2021). Source: Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.